Dear Financial Times: Free Trade Doesn't Require Perfect Competition

By

Donald J. Boudreaux, Ph.D.

September 16, 2009 - 8:57am

Editor, Financial Times

Clyde Prestowitz makes his case for higher tariffs by slaying a strawman ("[1]Obama can help free trade with tariffs," Sept. 10). According to Prestowitz, the case for free trade rests on "the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements."

But with the possible exception of the assumption about economies of scale - an assumption that even its notable champion, Paul Krugman, regards as being academic rather than practical - the case for free trade in no way depends upon any of these assumptions. For example, free-trader Adam Smith never heard of "perfect competition" (as the model wasn't developed until the 1930s). And even if he had heard of it, Smith would have understood that free trade is the best policy even when markets aren't perfectly competitive.

As for his claim that free trade requires that there be no cross-border investments or technology transfers, Prestowitz here commits the sophomoric error of mistaking assumptions used to simplify the explanation of the principle of comparative advantage for being conditions necessary for that principle to operate in reality. The case for free trade is not the least bit weakened by cross-border mobility of capital and technology.

Federal employees and military personnel can donate to the Media Research Center through the Combined Federal Campaign or CFC. To donate to the MRC, use CFC #12489. Visit the CFC website for more information about giving opportunities in your workplace.